As lawmakers debate how best to handle the student loan debt crisis, Senator Marco Rubio, R-FL, has reintroduced a bill that would change the way students pay federal direct student loans.
Under the Opportunities for Americans Now Act (LOAN), federal loan borrowers would pay one-time financing fees instead of interest. But depending on the type of loan, the fees can be up to 35% of the principal amount:
- Federal direct loans: 20%
- Graduate student loans: 35%
- Parent PLUS Loans: 35%
Read on for a comparison of the costs of the interest-free student loans on offer versus current federal interest-based loans, as well as to learn more about your alternative college funding options, including private student loans.
If you decide to supplement your graduate costs with private student loans, you can compare the interest rates of several lenders on Credible without affecting your credit score.
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One-off finance costs vs. interest: what’s the best deal?
The cost of one-time charges on federal student loans, as per the Loans Act, ends up being pretty much the same as what current borrowers might pay in interest. The financing charges proposed by the bill may seem high at up to 35%, but interest charges can add up quickly, especially for federal student loan borrowers who do not stick to their repayment plans.
“My bill would reform our federal student loan system so that borrowers do not end up with debts they can never pay off,” Senator Rubio said in a declaration of 4 August.
The advantage of an interest-free loan is that the amount paid by borrowers would be capped, while interest can become problematic for borrowers who are in default or withholding for long periods of time.
Suppose a borrower takes out $ 40,000 in federal direct loans at the current interest rate of 3.73%, according to the Ministry of Education. If they were to repay their student loans over a 10-year period, their student loan payments would average $ 400 per month and they would pay $ 7,984 in interest.
But if the same borrower took 15 years to fully repay their loans and had accrued interest while their loans were forborne, they could pay more than $ 12,000 in interest over the life of the loan. You can use Credible’s student loan calculator to see how much interest you would pay over time.
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Under the Loans Act, the 20% one-time fee on a $ 40,000 federal undergraduate loan would equal $ 8,000. But the fees could potentially be discounted based on the borrower’s annual income:
- Less than $ 45,000: up to 15 percentage points
- From $ 45,000 to $ 95,000: up to 10 percentage points
- Over $ 95,000: up to 5 percentage points
Borrowers would automatically be enrolled in an Income-Based Repayment Plan (IBR) and those who earn 150% of the federal poverty line (FPL) or less would not have to make loan repayments as long as their income remained at that level, according to the bill.
To reduce financing costs, borrowers would have the option of paying extra for their loan, in the same way that a borrower might consider paying off their loans earlier to reduce interest charges under the current loan system. student loan financing.
For graduate student loans and parent PLUS loans, borrowers would pay a financing fee of up to 35%. This is quite a big difference from undergraduate loans, but consider that the current student loan interest rates for these types are also much higher at 5.28% and 6.28%, respectively.
In contrast, interest rates on private student loans can be much lower, especially compared to PLUS loans. You can browse the interest rates for private student loans from real lenders in the Credible table below to see how different rates can impact the cost of borrowing.
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Federal or private student loans to finance your studies
The Loans Act is in the early stages of being introduced to the Senate, and it would still have a long way to go before it is passed and proclaimed into law. In fact, this is the second time the bill has been presented to Congress – it was the first time brought before the Senate in May 2019.
Borrowers looking for ways to pay for their education now would not have to worry about the loan law. Instead, they should consider the choices available to them for the 2021-22 school year: federal and private student loans.
Federal student loans come with protections and benefits that make them a good first choice when students are looking for ways to finance their college education. It is a good idea to start by filling out the Free Application for Federal Student Aid (FAFSA) to see what type of grants and loans you are eligible for.
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Private student loans can be a useful tool when looking for ways to pay for education expenses when federal loans do not cover the full cost of a college education. Private loans do not come with the same federal protections such as deferral, forbearance, and income-based reimbursement (IDR). However, private student loans can come with more competitive interest rates, which can make them an affordable borrowing option.
The interest rates for private student loans vary depending on the amount and duration of the loan, as well as your credit score. So, if you are considering borrowing for private student loans, be sure to seek the lowest possible interest rate for your situation.
Interest rates on private loans are holding near record lows, making it a good time to borrow private loans. You can compare the rates of several private lenders at once by filling out just one form on Credible.
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